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Lenders Learn how to Bank on Small Farms, Local Food

Nic Welty employs himself full time year-round raising lettuce, spinach, and other leafy greens in three low-cost passive solar greenhouses, which together cover less than one acre of land.

His Nine Bean Rows farm near Traverse City, MI, is one of many smaller, diversified, often first-generation farms in the country that defy expectations, particularly among bankers and others with money needed to finance the new food enterprises.

Most find it difficult to pencil out the possibility that such a niche farm business could reliably make enough money to grow. Yet as Welty explains, “This business is good enough to take a cash advance on a credit card and run with it.”

The fact that many smaller niche farmers must do just that is alarming to a growing group of activist lenders and small farm business advisors. They say it’s high time to line up resources behind the nation’s new farm entrepreneurs and the new jobs, food supply, and local commerce they are building.

Lender Re-Training. “There is a critical need to provide business and financial support to this sector to help it grow, prosper, and meet its economic and production potential,” says Denise Dukette, a New England Bank vice president.

Dukette is part of a team of experts who will this year conduct a series of workshops for nonprofit loan funds and other mission-driven Community Development Financial Institutions, or CDFIs. Their national association, the Opportunity Finance Network, will offer the training on farm production lending as part of a capacity building effort funded by the U.S. Treasury Department’s Healthy Food Financing Initiative.

Dukette and colleagues came together last year to assess the situation for small- and mid-scale diversified farms, and find leverage points for change. Their Financing Farming in the U.S. report found that building knowledge and capacity on the lender side of the farm financing equation is just as critical as building farmer’s financial skills.

“We want to make sure that a farm with a business model that works, and strong business management capacity, can communicate with lenders and get a fair shake in a loan,” says Mark Cannella, a farm business advisor with University of Vermont Extension.

A new USDA Economic Research Service study points to the economic development potential: The local food market that such entrepreneurs are largely forging is growing rapidly and amounts to nearly $5 billion annually, four times higher than previous estimates.

With the next Farm Bill on the horizon, there are new opportunities for Congress to support local and regional food systems. The Local Farms, Food, and Jobs Act, introduced in November 2011 by Sen. Sherrod Brown (D-OH) and Rep. Chellie Pingree (D-ME-1), contains several provisions to bolster funding for local food infrastructure and markets. One provision, for instance, would increase Business and Industry (B&I) federal loan guarantees for local and regional food enterprises. Another would require Farm Credit System lenders to implement a program for providing credit to farmers producing for the local market and to undertake initiatives to improve local food infrastructure.

Capital Jam. One problem is that few commercial bankers are familiar with farming anymore given consolidation over the years in both banking and agriculture, says Susan Cocciarelli of the Center for Regional Food Systems at Michigan State University. With funding from the WK Kellogg Foundation’s Food and Community Program, Cocciarelli co-convened the Financing Farming in the U.S. team with Dorothy Suput of The Carrot Project, a small-farm financing organization in the Northeast.

“Financial institutions have to have good information about the sector they’re lending into,” Cocciarelli says of the familiarity gap between lenders and new farmers.
Another small-farm financing challenge comes in the form of policies and practices among traditional farm lenders and agencies. Their loan criteria and other measures reflect where agriculture has been over the past decades of industrialization, not where a good portion of agriculture may be going with local and regional market opportunities.

Oregon farmer Zoe Bradbury ran into that problem in 2008. Her story is featured in a new report from the National Young Farmers Coalition about barriers to success for beginning farmers.

After investing her savings in startup equipment and supplies, Bradbury sought a small irrigation loan from the USDA Farm Service Agency. She ended up taking out a credit card cash advance instead, in large part because the local FSA office would only consider income projections based on low global commodity market prices for fruits and vegetables.

Yet Bradbury’s business is based on a much healthier diet of higher net revenues from direct-marketing produce at farmers markets and the like. She managed to pay down her debt before the credit card’s 18 percent interest rate kicked in a year later.

“It was the biggest, scariest financial risk I had ever taken,” Bradbury said. “I’d never been so far out on a limb.”

Growth Factor. Nic Welty has so far avoided the credit card risk so many others have had to take to finance their smaller diversified operations. But he’s wondering how he’ll finance further growth.

“It’s not so hard to get a loan for something solid (and saleable) like buildings and equipment,” he says. “But it’s almost impossible to get financing for the marketing, employee training, and other operational investments that will really make the difference.”

Patty Cantrell is a community organizer and a journalist focused on making the business case for local and regional food. As Regional Food Solutions LLC, she works with nonprofit and educational clients to communicate new food and farm business options and public policy directions.

2 Responses to “Lenders Learn how to Bank on Small Farms, Local Food”

We are developing a large sustainable farm by selling homesites around the existing old hay farm, rather like a village around a farm. Because this is a newer concept to protect and develop excellent agriculture land, lenders simply say “no”. We do not seem to fit any lender’s loan process perimeters. Any suggestions?